Under what conditions are value chains effective tools for pro-poor development?

Understanding the benefits, costs and risks when connecting small-scale producers to formal markets is critical to informing companies, farmers, NGOs and donors in their decisions. This paper (IIED, 2011, 50 pages) seeks to address key questions based on a review of literature and experiences in Africa and Latin America.

Understanding how to link poor producers successfully to markets, and identifying which markets can benefit what kinds of producers, are critical steps for the development community.
Formal markets have requirements – including quality, consistency, traceability, food safety and third-party certified standards (Fairtrade, Rainforest Alliance) – that necessitate direct communication and coordination along the supply chain.

While these requirements of formal markets raise the barrier of entry for new producers, particularly those with fewer assets, they also present potential opportunities for diversification, income generation and professionalization.

Some poor households can benefit from participation in formal supply chains not just as smallholder producers, but also as wage laborers in production or processing, and as providers in the service markets that support value chains.

The purpose of this paper is to draw together preliminary conclusions and open questions based on experience of IIED and a broad literature review of the impact of participation in formal value chains on the livelihoods of poorer producers. This is a critical topic for donors and NGOs as they consider the effectiveness of investment strategies.